Originally posted on https://www.longmonthousebuyers.com/blog/foreclosure-vs-bankruptcy-in-longmont-colorado-what-are-the-differences/

 

Even though bankruptcy filings are down, there were still 755,182 filings last year. If you are one of the many Americans that are struggling to pay their monthly bills, then you may be wondering what your options are. One option is to sell to cash house buyers in Longmont,Co like us! Or read on to find out just what your options are.

This is where the foreclosure vs. bankruptcy debate comes in. What are these two processes, and how can they help you?

We’ve created a guide to help you determine what the best course of action is for your specific situation.

Foreclosure vs. Bankruptcy

If you are struggling to pay your debts and they are starting to spiral, you still have some options. But to protect yourself and your future, you need to understand what the consequences are for each.

Bankruptcy

Bankruptcy is a legal tool that enables an individual or business to be discharged from their debts. In some instances, the debt isn’t discharged, but a payment plan is put in place.

There are two types of bankruptcy, Chapter 7 and Chapter 13. A Chapter 7 filing will liquidate the debtor’s property to pay off the creditors. A Chapter 13 filing will create a payment plan for the debtor to pay of their creditors in three to five years.

There are four different filings available under the Federal Bankruptcy Code. We’ve already discussed Chapters 7 and 13. The additional two are specialized filings.

Chapter 11 is reorganization and meant for businesses. Chapter 12 is for Family Farmers with Regular Annual Income.

Who Initiates

The individual that owes the debt initiates a bankruptcy. It is rare for creditors to force someone into bankruptcy.

Who Has Control of the Real Estate

You can retain control of your real estate when you file for bankruptcy. In many situations, your family home is protected from creditors.

This doesn’t mean you have to keep your home though. It may be beneficial for you to sell your home fast and get something smaller. Then you can use the excess proceeds to pay off debts.

Future Loans

You must let future lenders know that you have filed for bankruptcy. This may affect your ability to gain approval.

Impact on Credit

It depends on your specific situation how your bankruptcy filing will affect your debt. For some, it will lower it. For others, it will improve it through the removal of debt.

A bankruptcy will stay on your credit report for ten years. Thankfully, while it stays on your credit report longer, it is less damaging than a foreclosure.

Restrictions on Future Home Purchases

You won’t be subject to any restrictions when it comes to buying a new home. The only restriction you may run into is gaining approval from a lender.

Foreclosure

A foreclosure permits a lender or mortgage broker to claim ownership of a piece of real estate to satisfy the balance they are owed on a past due loan.

The process of a foreclosure can vary significantly from state to state. Most foreclosures fall into two main categories, judicial and non-judicial.

In a judicial state, the lender must sue the borrower in state court to gain approval to auction the property and recoup the unpaid debt. In nonjudicial states, the lender can auction the property without having to sue the borrower in court.

Who Initiates

Lenders are the ones who initiate the foreclosure. No borrower can ever or would want to initiate a foreclosure on themselves.

Who Has Control of the Real Estate

The specific process can vary by state, but the goal of foreclosures is for the lender to gain control of the property. This can happen at varying points in the foreclosure process.

Future Loans

You must report on future loan applications that you have been subject to foreclosure. This is to let future lenders know that you could not fulfill your agreement to pay a mortgage.

Impact on Credit

Prepare to see a significant drop in your credit score. It could be anywhere from 200-400 points. To make matters worse, a foreclosure will stick on your credit score for the next seven years.

Restrictions on Future Home Purchases

Don’t expect to buy another home right away. It will take five years before you can buy a home with restrictions. Or it will take you seven to buy a home without restrictions.

Bankruptcy and Foreclosure Working Together

Filing for bankruptcy will not automatically stop a foreclosure from happening. But when the two work together, the borrower will surrender the home to the lender.

One important distinction, when a home is surrendered as a part of the bankruptcy proceedings, then all debts are considered settled. This is not the case when there is an ordinary foreclosure.

How to Decide

If you are determined to keep your home, then filing for Chapter 13 is your best option. This will let you pay your mortgage off in three to five years. However, you will need to qualify for this option.

If you don’t qualify, your next best option is filing for Chapter 7. This won’t guarantee foreclosure prevention but will limit the amount you pay and have a less negative impact on your credit score.

The least desirable option is foreclosure. It gives you the least amount of control over your home and has the most negative impact on your credit score.

Know Your Options

If you find yourself struggling to pay your debts, then you have a few options. When it comes to foreclosure vs. bankruptcy, you need to understand the potential consequences to both the ownership of your property, your credit score, and your future.

Carefully weigh the options and determine what seems to be the more appealing option. If you need to sell your home fast, contact us todayand let us help.